Is the electricity market BROKEN?
Complaints about the power industry are intensifying with critics saying it's becoming increasingly unaffordable, writes Ian Llewellyn
The electricity market could be set for the most difficult 18 months in its history as high wholesale futures prices provoke more calls that the market is broken.
Complaints about the electricity market are not new and usually focus around the market power of the four major generator-retailers (gentailers), in particular Meridian Energy.
However, in recent months these complaints have intensified and are not being made by the usual suspects or by headline-seekers.
Instead, they're coming from senior figures within the industry and are being made quietly to officials, politicians and the media.
There are two main parts to the complaints. First, the way prices are set is pushing prices to artificially high levels.
The market works by paying the price of the most expensive generation of all that is offered and needed to meet demand. This means the price is low when the demand is being met by wind and hydro, but expensive when gas and coal is fired up to keep the lights on.
The second part of the complaint is that these factors are flowing through into futures prices, which are well above sustainable levels, say critics.
For instance, buying ahead now for winter 2023 costs between $225 and $270 a megawatt. This will fall into a range of between $200MW and $250MW in 2024.
This compares with a long-run historical average of between $60MW and $80MW.
A number of companies told Businessdesk this difference is making electricity unaffordable, putting businesses at risk and slowing electrification.
A long-running issue
This issue has been bubbling away since 2018, when a variety of factors, including gas supply constraints and dry periods, sent prices up much higher than historical averages for the first time for a sustained period.
These prices and the complaints have rarely hit the headlines or come up for political debate because households have been largely insulated from the higher prices. This is starting to change because retailers have to eventually start passing on costs.